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ANALYSIS

Pragmatic strategy

Manama, May 3, 2013

Martin Rivers

This article appeared in the May 2013 issue of The Gulf.

Why would Dubai World Central, which will eventually dwarf Dubai International Airport, inaugurate its historic passenger services with no-frills or niche airlines? The answer may ultimately come down to pragmatism.

Al Maktoum International Airport in Dubai will open its doors to passengers in October, when Saudi Arabia’s Nas Air and eastern Europe-based Wizz Air begin low-cost operations. The gateway began accepting cargo flights back in June 2010, but the start of passenger services marks the most significant milestone to date on its path to becoming the world’s largest airport.

The emirate’s existing hub, Dubai International Airport (DXB), is undergoing a $7.8 billion expansion project of its own, lifting annual passenger capacity from 75 million today to 90 million by 2018. But Al Maktoum Airport, also known as Dubai World Central (DWC), will eventually dwarf its forbearer with a capacity of 160 million passengers.

The need for rapid infrastructure investment was underscored in March, when DXB overtook Paris’s Charles de Gaulle Airport to become the world’s second busiest airport for international passenger traffic, behind only London Heathrow Airport. Dubai Airports boss Paul Griffiths expects to surpass the UK hub by 2015.

Having handled 57.7 million passengers last year (an increase of 13.2 per cent), it will be some time before DXB can challenge Hartsfield-Jackson Atlanta International Airport as the world’s busiest hub by overall footfall. The US airport handled 95.5 million passengers in 2012, most of them domestic travellers. Indeed DXB ranks only tenth globally based on combined passenger traffic, though its continued double-digit growth is matched by just a handful of emerging hubs in Asia and Turkey.

There is little doubt that DXB’s rapid growth will be inherited by DWC when Emirates Airline moves to the larger facility around 2025. The Gulf carrier’s traffic grew by 9.8 per cent in 2011/12, propelled by its success in re-directing intercontinental traffic flows away from traditional hubs in western Europe. With orders for another 198 aircraft, Emirates shows no signs of slowing down. But until the flag carrier relocates, both DWC’s growth trajectory and the types of airlines it will host remain unclear.

The selection of launch partner Wizz Air is noteworthy on several levels. Whereas Saudi’s Nas Air already has a deep footprint across the region, Wizz Air’s only other Middle Eastern destination is the Israeli city of Tel Aviv. Starting 28 October, it will add four connections to Dubai from Budapest in Hungary, Bucharest in Romania, Kiev in Ukraine, and Sofia in Bulgaria.

The European airline styles itself as an “ultra-low-cost carrier” in the vein of the continent’s largest and most uncompromising no-frills airline, Ryanair. Its business model embodies a radical interpretation of the low-cost ethos, stripping down in-flight services to the bare minimum and charging ancillary fees for everything from baggage to checking in at the airport.

Its approach contrasts with the higher service levels adopted by the two main Gulf low-cost carriers, flydubai and Air Arabia, whose fares are more all-inclusive due to prevailing cultural scepticism in the Middle East over the no-frills model. Wizz Air’s point-to-point network also differs from the hub-centric models of its Middle Eastern counterparts.

But while Dubai constitutes unchartered territory for Wizz Air, its addition is not altogether unexpected. The airline has widely publicised its intention to push into territories beyond core European markets. Subsidiary Wizz Air Ukraine has the explicit goal of strengthening eastern connectivity, initially by turning Kiev into a hub bridging secondary Ukrainian cities with western Europe. It also operates flights to Kutaisi in Georgia.

Europe’s other low-cost carriers are looking for opportunities beyond the saturated EU market too. Ryanair in January confirmed that it will station aircraft outside Europe for the first time, establishing operational bases in the Moroccan cities of Fez and Marrakech. EasyJet also serves Morocco, as well flying to Egypt, Jordan and Israel. If Russia’s government honours its commitment to liberalise bilateral restrictions and tackle monopolistic airport services, that will open the floodgates for low-cost flights in its vast, under-served territories.

“What Ryanair looks for is locations where it can essentially create its own market, where either there are high-cost incumbents or no incumbents,” explains Patrick Edmond, managing director of Dublin-based E2consult. “So it’s logical that they would now look to eastern Europe, and also potentially Israel and some parts of the Middle East.”

But while the motivations of Europe’s airlines are clear - diminishing returns at home necessitate a focus on far-flung, untested markets - the consequences for the Gulf’s fledgling low-cost sector are hazier. flydubai provides valuable feeder traffic for partner carrier Emirates, so Dubai’s government is unlikely to usher in competitors that might stunt its growth. Wider regional handicaps caused by visa requirements and bilateral restrictions will also hamper efforts to roll out EU-style point-to-point connectivity.

Notwithstanding newfound interest among Europe’s carriers, a low-cost revolution in the Gulf therefore remains a distant prospect. Only cross-governmental collaboration could bring the Middle East closer to Europe’s open skies. Instead, miniature hub models akin to Air Arabia’s bases in Sharjah, Alexandria and Casablanca are the region’s best vehicle for tapping into hybridised low-cost travel.

It is reasonable to ask, then, why DWC would inaugurate its historic passenger services with Wizz Air - an overseas airline that embodies an unfamiliar and, in the eyes of many, unfriendly business model? The answer may ultimately come down to pragmatism.

In Qatar, the opening of Doha’s new Hamad International Airport has been postponed beyond the planned date of 1 April. When it begins operations, the new hub will have an annual capacity of 29 million passengers. Crucially, four of the ten airlines selected as launch partners are low-cost or hybrid carriers (Air Arabia, Air India Express, flydubai and RAK Airways). The remaining six are mostly small flag carriers with limited scope - among them Iran Air, Nepal Airlines, Biman Bangladesh Airlines and Syrian Arab Airlines.

In Doha as in Dubai, the hubs are being weaned into existence by either no-frills or niche airlines. This makes life easier for the airports’ operators, as such carriers run low-frequency flights with smaller aircraft. No-frills passengers also tend to be more forgiving when encountering hiccups such as disruptive and noisy construction work.

It is too early to say whether Europe’s low-cost carriers are planning to invade the region en masse. There are entrenched regulatory hurdles to overcome, and flying times from western Europe sit uneasily with the high utilisation strategies at the core of low-cost models. But there is no doubt that airports in the United Arab Emirates (UAE) are expanding at breakneck speed, and a variety of airlines will be called on to help foster that growth.

Abu Dhabi International Airport saw passenger numbers rise 13.1 per cent in February, thanks mainly to Etihad Airways. Sharjah International Airport, home to Air Arabia, recorded 15.7 per cent growth in the first quarter of 2013. Footfall at Ras al Khaimah International Airport rose 24 per cent last year. It stands to reason that Europe’s most successful airlines, the low-cost carriers, will want a piece of that pie.




Tags: airport | DWC | Dubai World Central | Airlines | DXB |

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